Fast Track to Recovery

Post-recession success depends on tapping the informal aspects of an organization and avoiding the temptation to rely solely on formal systems, processes, and programs.

strategy + business magazine

by Jon Katzenbach and Zia Khan

Coming out of the worst recession of modern times will, for many companies, be more challenging than navigating the downturn itself. …

Two of the skills companies most need in this nascent phase of the economic turnaround are speed and adaptability. … Unfortunately, these are not strengths of the formal, rational organization, which is typified by analysis, strategies, structures, processes, and programs codified in charts, graphs, flowcharts, spreadsheets, and PowerPoint presentations. The capabilities most vital to recovery are actually embedded in the informal organization, which is emotional, highly interactive, and cross-organizational, and encompasses personal beliefs and values, peer relationships, consensus building, emerging ideas, social networks, and communities of common interest.

In most successful turnarounds and recoveries, informal activities accelerate behavior change and improved performance beyond what would have been possible through formal efforts alone. …

As critical as the informal, “soft” side of things is, it cannot become an end unto itself; it must be viewed as an approach or a tool for accelerating and enhancing hard results. In fact, when the informal and formal are in balance and aligned, the performance improvements and strategic advantages that accrue are tough to outpace. People feel emotionally satisfied when they are recognized for steps that lead to concrete goals. And concrete goals (as well as the steps that lead there) serve as motivating points for soft enablers such as sustained commitment, unleashed creativity, and collaboration across barriers. … Here are the five most salient challenges that companies can expect to face, and the potential impact of soft skills that management should consider.

1. Sustainable lower-cost operations. Recessionary cost cutting is typically aggressive and arbitrary, with little consideration of future needs. … Hence, recessionary cost cuts are mostly temporary and the costs come back quickly. Two aspects of the informal organization can help avoid this insidious “cost creep.”

• The informal organization is integrated across organizational boundaries; as a result, it can sustain lasting collaboration that is hard for competitors to match.
• Informally supported commitment lasts longer. Because of the emotional power of motivation, people feel good about, and take pride in, sustaining lower costs. For example, rather than implementing formal cost-cutting goals to trim US$50 million in expenses, Texas Commerce Bank reframed its objective to adopt a more energizing theme: eliminating whatever annoys bankers and drives customers crazy. …

2. Competitive advantage. Competitive advantage is most powerful when it is based on the few distinctive capabilities that a company can sustain over time, such as Southwest’s point-to-point travel system (its alternative to a hub-and-spoke network). To drive consistent company-wide skills — indeed, to derive a company’s identity and maintain an advantage over rivals from a set of company-wide skills — objectives must be consistent across the organization as well as from top to bottom. Both formal and informal mechanisms are needed to instill the operational focus into the company culture.

3. Breakthrough innovation. … A lot of companies can come up with an innovative, winning product or service once or twice, but the few that manage to do so routinely have mastered two critical capabilities: identifying and cultivating creatively gifted individuals, and nourishing informal networks. Ideally, gifted individuals are planted in parts of the organization where they can extend their interactions with people who can enrich their creative ideas as well as with people who can ensure that there will be appropriate support and buy-in. …

4. Superior customer service. Enterprises that excel at delighting their customers are masters of an institutional capability for customer empathy that goes well beyond the immediate sales transaction or customer interface. … Not surprisingly, they are able to command a premium price as well as maintain a virtually unassailable market position. …

5. Collaboration in a flattening world. Most enterprises today are facing some kind of new global reality — in their marketplace, in their operating model, or in their financial or human resources options. … We can no longer rely on formal mandates plus instinct and chance to make the critical connections — many of those connections are emotionally rather than rationally determined. Therefore, business today cries out for integration of the formal and informal.

No organization wants to merely survive. Unfortunately, as we are climbing out of the recession, many organizations appear to be stuck in survival mode. … More than ever, therefore, survivors need to cultivate a spirit that is not content to drag the workforce along in a quest for transformation in critical parts of the enterprise. Transformation can be achieved only if the informal organization is unearthed to energize and refocus cultural elements in positive ways: accelerating behavior change, promoting peer-to-peer interaction, and ensuring a positive emotional commitment to grow and win again. Just as it is important to have a vision that inspires ambitions beyond next year, it is critical to have an informal organization that supports, energizes, and challenges the formal. Both informal and formal dimensions are important influencers of behaviors that determine future performance and competitive position. We need the best of both worlds.

See “Leading Outside the Lines” by Jon Katzenbach and Zia Khan, s+b, Summer 2010.

Author PROFILES:

• Jon Katzenbach is a senior partner with Booz & Company, where he leads the Katzenbach Center in New York. A cofounder of Katzenbach Partners LLC, he is the author or coauthor of eight books, including Why Pride Matters More Than Money: The Power of the World’s Greatest Motivational Force (Crown Business, 2003).
• Zia Khan is vice president of strategy and evaluation at the Rockefeller Foundation in New York, and a senior fellow at the Katzenbach Center.